Higher SBP reserves keep exchange rate stable

After inflows from the International Monetary Fund (IMF), the foreign exchange reserves of the State Bank of Pakistan (SBP) increased enough to cover 1.6 months of imports, helping the exchange rate to remain stable. The SBP reported that the reserves of the central bank went up by $243 million to $8.27 billion during the week ending on Jan 19.

The IMF Board meeting held on Jan 11 approved the second tranche of the Stand-By Arrangement (SBA) of $3b. The SBP received $700m from the IMF in the third week of the current month. However, the size of the SBP reserves could not improve to reflect the full impact of the inflows.

Pakistan has been regularly meeting its obligations for foreign debt servicing, with a requirement to pay $24bn during FY24. The country is also actively engaged in negotiations for the rollover of debts. Recently, the United Arab Emirates announced the rollover of $2bn maturing during the current fiscal year. The debt repayment has been extended for another year, now scheduled until January 2025.

The $8.2bn reserves of the SBP have also encouraged the government to ask the IMF to send a review mission for the third tranche of $1.2bn under the SBA, with expectations to receive it in March 2024. However, currency markets and bankers have found the situation healthy for the economy, as the PKR has been appreciating and not allowing the dollar to jolt the exchange rate. The exchange rate has remained stable for more than a couple of months, benefiting importers and exporters who can make timely decisions instead of waiting for the settlement of fluctuating dollar rates.

Bankers noted that the inflows of export proceeds are now smooth, and exporters are not willing to keep dollars with them since the PKR has been appreciating, albeit inch-by-inch, against the greenback.

Importers find the opening of LCs difficult due to restrictions from the SBP, but they mention that the stable exchange rate has eliminated the panic element from the market. Imports have drastically reduced during the first half of the current fiscal year, helping to reduce the twin deficits, trade and current account deficits.